S&P Global Ratings has downgraded The Bon-Ton Stores Inc. due to its perceived weakened liquidity.
The ratings agency on Monday said the lowered corporate credit rating to “CCC” from “CCC+,” noting that the ending of a previously announced sale-and-leaseback agreement suggested “weakened liquidity as a result of significant debt maturity and our expectation for a protracted weakness in operating results.” The agency also said it believes the company’s capital structure is unsustainable, and that there is “significant refinancing risk for upcoming debt maturities absent meaningful performance improvement.”
More notably, the agency said it placed the outlook at “negative,” reflecting the view that a “default could occur in the next 12 months, given the company’s eroding liquidity following the termination of the company’s sale-leaseback transaction and our expectation for protracted weakness in the operating environment.”
In the agency’s report, the credit team noted the refinancing risk connected with an upcoming debt maturity within 12 months “absent a meaningful turnaround in operating results.” The S&P team said it was projecting that the “decline in customer traffic will persist and adjusted EBITDA margins will be constrained by the ongoing highly promotional environment.” It also said that it believes the retailer will generate “significant negative free operating cash flow in 2016,” leading the company to increase its dependence on its asset-backed revolver to fund operations and cash interest obligations. The upcoming debt that matures in 2017 is a $330 million, with $57 million outstanding, second-lien note that matures in July 2017.
The S&P cited Kohl’s Corp., J.C. Penney Co. Inc., Dillard’s Inc. and Macy’s Inc. as competitors, and said “we do not foresee any material improvement to Bon-Ton’s competitive position or operating scale over the next year given its recent results and the negative trends in the operating environment.”
The credit analysts further explained, “We think apparel purchases are highly discretionary and operating performance remains vulnerable to economic conditions.” They went on to note that the changes are less about cyclical headwinds and more about secular change, with consumers increasingly shifting their purchases online because of convenience, selection and price transparency.
In deciding to downgrade Bon-Ton’s corporate rating, the credit analysts presumed an operating environment in which U.S. economic growth of 2.3 percent in 2016, GDP growth of 2.5 percent in 2017, and single-digit declines in comparable-store sales.
Following the S&P downgrade, Bon-Ton on Tuesday reaffirmed its guidance for fiscal 2016 and said it continues to expect adjusted EBITDA at between $130 million to $140 million. The loss per diluted share is expected at between 95 cents to $1.45. The company is also presuming a comparable-sales performance ranging from flat to a decrease of 1 percent.
Kathryn Bufano, president and chief operating officer, said the company is exploring options to pay down its senior notes due in 2017.